The Federal Reserve will face more urgency in its fight to cool the US economy, as the latest batch of labor market data showed an unexpected uptick in jobs gains and strong wage growth.
Data released on Friday eased concerns that the US economy was slowing sharply or already in recession after two consecutive quarters of contraction in output this year. However, this would raise concerns that the roots of high inflation could grow as wages continue to rise, necessitating even more intervention by the central bank.
The Fed has already raised its key interest rate from rock-bottom levels of the coronavirus pandemic to a target range of 2.25 percent to 2.5 percent this year, including two consecutive 0.75 percent hikes in June and July.
On the back of the latest jobs report, economists and Fed watchers say the prospect of another aggressive upward move next month has increased, although the central bank will still closely scrutinize upcoming economic data, including next week Inflation figures are also included.
“Today’s data should ease fears of a recession, but raise concerns that the Fed has too much work to do, and we now think a 75 basis point increase in September is likely. JP Morgan Michael Feroli, a senior economist at the U.S., wrote in a note on Friday, the inflation concerns motivating the Fed will only increase with this jobs report.
“Jobs have not slowed at all in response to the tightening of the Federal Reserve. It’s a double-edged sword,” said Michael Gapen, chief US economist at Bank of America, noting that “a near-term recession is short”, “The risk of a hard landing is increasing”.
David Merrill, chief US economist at Goldman Sachs, said the report has cleared some “ambiguity” on the strength of wage growth in the US economy, suggesting it was not as smooth as the Fed might have hoped.
“The overall message is that wage growth is going sideways at a rate that’s probably a few percentage points stronger than it is conducive to achieving 2 percent inflation,” he said, which is the Fed’s long-standing inflation target. Yes, he said. “The Fed has to go further than we thought before today.”
Fed Chairman Jay Powell is expected to reflect on his latest thinking on the path to US interest rates and the central bank’s strategy to reduce inflation at the annual Jackson Hole, Wyoming conference in late August.
During his last press conference in July, Powell said that “another unusually large increase” in interest rates in September “could be justified” but that the decision had not been made.
“This is what we will make based on the data we see. And we are going to take a decision by meeting,” he said.
Financial market movements could also be a factor in the Fed’s next move. Traders began pricing in hopes of a higher interest rate hike after the jobs data, anticipating that rates would hit 3.64 per cent in March, compared to 3.46 per cent expected before the report. Fed funds futures show a growth potential of 0.75 percent in September, having risen to 67 percent from 33 percent on Thursday.
While strong jobs numbers add to pressure on the Fed, it was welcomed by the Biden administration, as it means there is little chance of a sharp economic slowdown ahead of November’s midterm elections.
It comes as Congress prepares to vote on a $700bn package of measures designed to curb inflation by raising taxes on large corporations, slashing drug costs and narrowing the budget deficit – even if it is clean. Promote spending on energy incentives. To fight climate change.
“This bill is a gamechanger for working families and our economy. I expect the Senate to pass this law as soon as possible,” Biden said on Friday.